U.S Tests Rare Legal Path in Financial Crisis Cases

An Obama administration
task force established to investigate misconduct that fueled the
financial crisis is turning to a little-used statute that may
make such cases easier to bring, according to people familiar
with the matter.

An Obama administration
task force established to investigate misconduct that fueled the
financial crisis is turning to a little-used statute that may
make such cases easier to bring, according to people familiar
with the matter.

The federal statute, FIRREA, was passed in the wake of the
savings-and-loan scandals in the 1980s. It requires a lower
burden of proof than criminal charges, has a longer statute of
limitations than other financial laws and potentially could
bring big fines.

But it has appeared in only a few dozen cases since it was
enacted in 1989.

The task force, which is in the Justice Department, used
FIRREA earlier this year when it issued more than a dozen civil
subpoenas to top financial institutions, including Citigroup
, the people familiar with the matter said.

The subpoenas ask for documents related to mortgage-backed
securities offerings between 2006 and 2008.

President Barack Obama announced the task force during his
State of the Union address in January and hailed it as a way to
hold accountable those who broke the law and contributed to the
housing crisis.

The Securities and Exchange Commission has brought a handful
of high-profile cases related to the 2007-2009 financial crisis,
including against former Countrywide Financial Chief Executive
Angelo Mozilo and Wall Street giant Goldman Sachs. But
the Justice Department has struggled to bring criminal charges.

The frustration, in part, has been because such charges
involve securing evidence that shows beyond a reasonable doubt a
defendant intended to break the law.

For example, a federal jury in 2009 acquitted two former
Bear Stearns hedge fund managers accused of continuing to push
souring investments as sound.

Jurors said prosecutors did not prove the case, which relied
on e-mail evidence, beyond a reasonable doubt. Since then, the
Justice Department has brought few major prosecutions tied to
the subprime crisis.

But people familiar with the thinking of the task force say
the group believes FIRREA - the Financial Institutions Reform,
Recovery, and Enforcement Act - may prove a critical tool.

FIRREA allows the government to bring civil charges if
prosecutors believe defendants violated certain criminal laws
but have only enough information to meet a threshold that proves
a claim based on the "preponderance of the evidence."

Adam Lurie, a lawyer at Cadwalader, Wickersham & Taft who
worked in the Justice Department's criminal division until last
month, said that although criminal cases based on problematic
e-mails without a cooperating witness could be difficult to
prove, the same evidence could meet a "preponderance" standard.

That means a jury must only find that something is more
likely than not. It is "a much easier case to make," he said.

The law also gives the department broad investigative tools,
including the ability not only to subpoena documents, but also
to take testimony from individuals, an ability prosecutors are
not normally afforded in civil cases.

TASK FORCE MEMBERS

The task force includes the Justice Department, the SEC, the
FBI and the Department of Housing and Urban Development, among
others. It is charged with investigating the pooling and sale of
home loans that contributed to the financial crisis.

While the group faced some skepticism, considering the
crisis began nearly five years ago, there are signs it is
serious about bringing cases.

The co-chairs meet formally every week and talk almost every
day to coordinate on "a range of investigations," a Justice
Department official said, on condition of anonymity.

About 50 staff members are working on the effort, and the
task force has identified separate office space in Washington
and will move some personnel there, the official said.

The Justice Department last month posted a one-year position
of full-time coordinator for the working group who could help
manage discovery and coordinate investigations, according to the
job posting.

The DOJ has also requested a $55 million increase for the
fiscal year beginning in October to increase efforts to combat
financial and mortgage fraud.

"Significant efforts continue to move forward and if they
uncover evidence of fraud or other illegal conduct, we will
pursue such conduct aggressively," DOJ spokeswoman Adora Andy
said.

MORE TOOLS

FIRREA was initially designed to go after individuals who
defrauded federally insured financial institutions. But it is a
broad statute that allows prosecutors also to bring civil
charges against mail and wire fraud.

The law allows for civil penalties of up to $1 million for
each violation and up to $5 million for continuing violations,
with a 10-year statute of limitations.

"As time goes on this may become one of the only vehicles
left to prosecute some of these residential mortgage-backed
securities cases," said Eli Kay-Oliphant, a securities and
white-collar defense lawyer at the law firm Latham & Watkins.

The statute has quietly been used in the past year by
federal prosecutors in New York City in a number of recent
cases.

In March 2010, U.S. Attorney Preet Bharara in Manhattan
announced the creation of a new civil fraud unit and filed its
first lawsuit under FIRREA in December of that year, against a
mortgage fraud scheme.

In February, Bharara's office entered a settlement with
Citigroup over allegations that its CitiMortgage unit defrauded
the government into insuring thousands of risky home loans.

A whistleblower originally filed the claims under the False
Claims Act, but the government added FIRREA allegations when it
resolved the case.

The $25 billion mortgage servicing settlement approved last
week, which resolved federal and state allegations that five top
U.S. banks engaged in misconduct when servicing home loans and
processing foreclosures, also included violations of FIRREA.

TESTING THE WATERS

It is unclear how successful the growing use of FIRREA will
be. Lurie, the former Justice official, said it's "largely
uncharted territory," and defense lawyers have already started
pushing back on the government's use of the law.

In a motion to dismiss the lawsuit filed last month, Allied
said the government had sued the company under provisions of the
law that apply only to individuals.

Regardless, prosecutors around the country are turning to
the law. Lawyers who received the subpoenas from the federal
task force said they have also seen FIRREA subpoenas from other
U.S. attorneys' offices, including in Colorado, Philadelphia and
Boston.

"If the Department now intends to step up its use of the
statute, companies could face a new paradigm in anti-fraud
enforcement," Lurie said.
(Reporting By Aruna Viswanatha, Editing by Karey Wutkowski and
Dan Grebler)